Comcast’s Businesses Fired On All Cylinders In the Fourth Quarter

Comcast
shares jumped almost 6% on Wednesday morning after the company increased its dividend and posted fourth-quarter results slightly above Wall Street estimates.

The company beat expectations thanks to strong results in both cable and media segments, bucking some investors’ worries that cord-cutting will hurt Comcast’s businesses over the long term. Those two segments include Xfinity, the U.S.’s largest consumer cable, voice, and high-speed internet service, and the media business NBCUniversal.

Comcast (ticker: CMCSA) earned an adjusted 64 cents per share, while the consensus forecast among analysts was for 62 cents. Adjusted revenues came in at $27.8 billion, compared with the consensus forecast of $27.6 billion.

The stock rose to about $36.90 on Wednesday morning. Over the past year through Tuesday’s close, it has produced a negative return of 16.5%, including dividends, as management first bid for the majority of
21st Century Fox
(FOXA)—losing out to
Walt Disney
(DIS)—then for control of Sky, the European pay-television operator, ultimately paying a hefty price.

Comcast’s cable business surprised investors as gains in customers at its broadband service far outpaced declines in video subscribers. The company added 351,000 net new high-speed internet subscribers—in line with analysts’ estimates—while losing just 29,000 video subscribers, compared with the 60,000 expected.

In the same period last year, Comcast lost 33,000 video customers. Cable revenue grew 5.2%, to $14.1 billion, powered by a 10.1% increase in high-speed internet revenue.

Those high-speed internet accounts come with higher profit margins than video accounts, effectively increasing the profitability of Comcast’s cable business just through a shift in product mix, before any cost cutting or price increases. Adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, for each customer relationship in the segment rose almost 4% versus the same period last year.

Overall, Comcast added a net 258,000 cable customers and increased Ebitda at the cable business 7.3% year over year to $5.8 billion in the fourth quarter. Cable’s Ebitda margin was 40.9%, up 0.8 percentage points from last year.

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On Wednesday’s earnings call, Chairman and CEO Brian Roberts made it clear that growth in high-speed internet accounts will be Comcast’s priority. “We expect connectivity will again be the growth engine of our cable business in 2019 and beyond with sustainable benefits to our financial results as our mix shifts more towards these margin-accretive businesses,” he said.

Last week, NBCUniversal announced a new direct-to-consumer streaming service which it plans to launch early next year. The service will consist of multiple tiers, including ad-supported and ad-free versions, and will be available to all existing NBC pay-TV subscribers for no additional cost. People who don’t subscribe to pay TV—the increasingly common cord-cutters—can buy the service for $12 a month. An additional fee is required to remove ads.

The service, yet to be named, will include original content from NBCUniversal’s library, which includes shows from NBC, USA Network, and SYFY, as well as movies from the Universal and DreamWorks film studios. In contrast to Disney, which is preparing its own direct-to-consumer streaming service and has warned of upfront development costs, Comcast doesn’t expect the level of investment required to launch its service to have a meaningful impact on earnings.

“We anticipate a manageable level of investment will be required to build-out and scale the service over several years with a negligible impact to our financial results in 2019,” said Comcast CFO Michael Cavanagh on Wednesday’s earnings call. “We will be measured in our production of streaming originals, aligning the levels of spend with the consumer and financial scale of the service over time.”

Comcast increased its dividend by 10%, to 84 cents per share for 2019. It’s the 11th straight year the company has raised its dividend. The stock yielded about 2.3% as of Wednesday morning’s price.

The company also completed its $39 billion acquisition of European pay-TV provider Sky in the quarter, which added $5.0 billion in revenue and $765 million in Ebitda. To free up funds to reduce its debt from the transaction, Comcast will suspend its share repurchase program in 2019. It bought back $5 billion in stock in 2018.

Analyst Craig Moffett of MoffettNathanson has been skeptical of Comcast’s acquisition strategy and the sustainability of its core cable and media businesses in the past. But he said he was impressed by Wednesday’s results.

“Comcast is unmistakably a conglomerate now; its businesses are distinctly separate from each other,” Moffett wrote in a report Wednesday morning. “Yes, conglomerates deserve a discount. But all of Comcast’s businesses are operating well.”

He said that while the stock has languished, becoming cheaper and cheaper, Ebitda has increased. The “conglomerate discount has already been applied, and results eventually matter,” Moffett wrote. “Comcast is getting easier to like.”

Moffett has a Neutral rating on the stock with a target price of $41 a share.

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